Wednesday, October 05, 2011

2012, here we come.... (#13)

Fools' errands and fools' gold...is how leading American historian John W. Dower has characterised both post the 9-11 military-statebuilding adventures and the financial collapse of 2008.

These were parallel phenomena in his mind, because both were grounded in historical amnesia and an ideological commitment to the notion that we have somehow slipped the usual constraints, allowing free makets alone to take full control of both political and economic systems.

So perhaps it isn't so hard to see why some of our fellow Europeans have tended to regard the resulting mess as largely an 'anglo-saxon' problem. This allowed them to erect an imaginary Maginot line between themselves and the consequences of this anglophone shallow-mindedness, and now that it has been definitively breached, they are only just starting to realise how much trouble they are in.

When the crisis first broke regulators ordered European banks to increase their liquidity buffers and most of them did so by investing heavily in government bonds, seen then as comparatively risk-free as well as highly liquid. Meanwhile, believing that the problem lay elsewhere, the French and the Germans went about the recapitalisation of their banking system with a lot less enthusiasm than their US and UK counterparts.

Now almost half of the €6,500bn stock of eurozone sovereign debt is showing signs of heightened credit risk and this particular, highly interconnected part of the global financial infrastructure is surely carrying the greatest exposure.

BNP alone has a eurozone sovereign debt exposure of some €75bn, amounting to roughly 6% of total assets, including €14bn of Greek debt and €21bn of Italian government bonds. And that's just BNP. The other two major French banks, SocGen and Credit Agricole each have exposures of a similar order of magnitude. Collectively, French banks have €56bn of Greek sovereign bonds alone. They've so far only written down this Greek debt by around 20%, or in line with the restructuring agreed at the time of the last bailout.